March 21, 1989
IRS Will Continue to Examine
the Returns of Government Employees
In light of a recent Tax Court decision, the Internal Revenue
Service today said that it will continue to examine the returns of
government employees who are paid out of non-appropriated funds and
claim the $70,000 exclusion for income earned abroad.
On February 16, the United States Tax Court, in David W.
Matthews, et ux. v. Commissioner, ruled that personnel of non-
appropriated fund instrumentalities are generally employees of an
agency of the United States and not entitled to the foreign earned
income exclusion. Non-appropriated fund employees are civilians who
typically work in overseas military commissaries and recreational
Under section 911 of the Internal Revenue Code, many Americans
living and working overseas are allowed to exclude up to $70,000 of
their earned income from taxation. The law does not permit U. S.
government employees to claim this exclusion, however. Some
non-appropriated fund employees had contended that they are not
government employees for tax purposes because they are paid from
funds not appropriated by Congress.
The IRS has consistently taken the position that these
individuals are government employees and not entitled to the
exclusion. The Court, in Matthews v. Commissioner, upheld the IRS
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